YES Bank: Slipping up

The sharp rise in provisioning and slippages in the latest March quarter, leading to a loss of ₹1,507 crore, has brought the focus back on YES Bank’s asset quality woes.

Investors may have rejoiced too soon over the moderation in slippages in the December quarter (excluding IL&FS impact). Identifying potential stress accounts of about ₹10,000 crore and making contingent provisioning on them, sharp rise in BB and below-rated corporate book, and low provision cover — all indicate more pain for the bank in the coming quarters.

Also, the probe of a whistleblower complaint alleging irregularities in operations, potential conflict of interest in relation to the former MD and CEO Rana Kapoor, and allegation of incorrect classification of bad loans, are ongoing. The implications of this are awaited in FY20.

Since the November low (₹160 levels), the stock has rallied sharply over 40 per cent on hopes of the NPA issue bottoming out.

The RBI’s nod for Ravneet Gill to be the bank’s CEO, also lent comfort to investors.

The stock of YES Bank is likely to see a knee-jerk reaction to the dismal March quarter earnings on Tuesday, as the results were declared post market hours on Friday.

That aside, the stock is likely to remain under pressure over the medium term, owing to persisting concerns over asset quality and considerable slowdown in loan growth.

Investors can book profits at the current levels as earnings are likely to remain under pressure in the coming year.

Asset quality woes

Ever since YES Bank reported sharp divergences in the September 2017 quarter (pertaining to FY17), its asset quality has been under watch.

The bank had reported gross NPAs of ₹2,019 crore for 2016-17. But as assessed by the RBI, the gross NPAs should have been ₹8,373 crore for that year.

The bank held that, since most of the accounts were already repaid, sold to ARC or upgraded as standard on account of satisfactory account conduct, the overall impact of the divergence had reduced to ₹1,219 crore (classified as NPA) by the September 2017 quarter.

In the March 2018 quarter, higher repayment on these accounts or sales to ARCs, had further watered down the impact to a much lower ₹485 crore.

But given that the bank had reported divergences of ₹4,176 crore for 2015-16 and ₹6355 crore for 2016-17, the RBI’s Annual Risk Based Supervision, pertaining to FY18 was keenly awaited.

While YES Bank has stated that it has not had to make any disclosure on divergence pertaining to FY18, other data points have heightened concerns on bad loans once again.

For one, slippages have been steadily moving up in the past three quarters.

From ₹380 crore in the March 2018 quarter, slippages rose to ₹560 crore in the June quarter and then to ₹1,631 crore in the September quarter.

In the December quarter, overall slippages were higher at ₹2,297 crore — which included ₹1,913 crore of slippages on account of the bank’s IL&FS exposure.

In the latest March quarter, aside from slippages of ₹552 crore on account of an airline company (presumably Jet Airways) and ₹529 crore in relation to an infrastructure conglomerate (IL&FS), slippages have been elevated.

An overall slippage of ₹3,481 crore in the March quarter has taken the gross non performing asset ratio GNPA to 3.22 per cent of assets from 2.1 per cent in the December quarter.

Two, the bank has identified ₹10,000 crore of stressed accounts in real estate, media and entertainment and infrastructure sectors.

It has made a contingent provisioning of ₹2,100 crore (about 20 per cent) on these accounts. A possible increase in such stressed accounts and provisioning in the coming quarters cannot be ruled out.

Three, there has been a sudden and sharp increase in the proportion of BB and below-rated corporate loan book in the March quarter (to 8.3 per cent from 2.5 per cent in the December quarter).

This will need a close watch in the ensuing quarters. Lastly, provision coverage has slipped to 43 per cent in the March 2019 quarter (from 50 per cent last year), despite the sharp rise in provisioning in the March quarter.

From healthy levels of 60-70 per cent in FY15 and FY16, provision coverage has been falling over the past three fiscals.

Growth moderation

Reversal in interest income on account of rise in bad loans and one-time reversal of ₹280 crore in corporate fee income has impacted YES Bank’s core performance in the latest March quarter. The steep rise in provisioning to ₹3,662 crore in the March quarter (more than nine times that recorded in the same quarter last year) has pushed the bank’s earnings into the red. Any sharp rise in slippages can continue to weigh on earnings in the coming quarters. Also, YES Bank’s loans have been growing at a robust 30-50 per cent over the past two to three fiscals. As of the December quarter too, loan growth (YoY) was 42 per cent.

As of March 2019, the growth has slowed to 18.7 per cent. The management, in its call, indicated that it would look at a more calibrated growth — late teens to 20 per cent — rather than chase high growth of 40-50 per cent as seen in the past. The slowdown in credit growth would also impact earnings.